The core conclusion of this report:
blockchain promises cost savings for banks so dramatic, it will disrupt many lines of business and core banking functions, including assets liability management, regulatory compliance, cross-product processing, and trade execution.

In fact, the report touts cost savings of 70% or more in these areas, with savings of over 50% for the entire finance function, as well as liquidity risk, complex finance, and other areas.

Always the skeptic, I decided to follow the maxim if it sounds too good to be true, it probably is. Does the argument in the Accenture/McLagan report hold water? Or is it just another example of the fragile hyperbole so common in the blockchain world today?

Building block chains hasn’t always been so complicated.woodleywonderworks

Disruption – or Simply Modernization?

The general consensus on the promise of blockchain centers on disrupting – or even reinventing – how multiple parties execute transactions in various scenarios, from simple money transfers to complex real estate deals.

Simplifying transactions, however, isn’t where the big cost savings are, according to the Accenture report. “Today, investment banks spend an estimated two-thirds of their IT budgets on legacy back-office infrastructure,” explains David Treat, Managing Director of Accenture Financial Services and Blockchain Lead. “Blockchain could lead banks to decommission much of that infrastructure and externalize key operational processes. It could completely change the cost dynamics in these organizations.”

Accenture’s competitor PWC has reached a similar conclusion. “According to a Santander FinTech study, distributed ledger technology could reduce financial services infrastructure cost between US$15 billion and $20 billion per annum by 2022,” says Max Di Gregorio, Technology Consulting Financial Services Lead for Middle East & North Africa at PWC, “providing the possibility to decommission legacy systems and infrastructure and significantly reduce IT costs.”

Mainframe: Unlikely Blockchain Wild Card

Whether blockchain will enable banks in particular to reduce their legacy systems and infrastructure costs, however, is an open question – especially considering such institutions typically run on mainframes.

In fact, rather than an excuse to retire mainframes, blockchain is shaping up to be a reason for banks (among other enterprises) to double down on their mainframe investments. In fact, mainframe leader
IBM has made a bet-the-company investment on blockchain on its IBM Z mainframes.

In fact, this strategy is so critical to IBM that blockchain is helping Big Blue position mainframes at the center of its cloud strategy. “IBM’s approach however seems to have already stolen the march somewhat over AWS and Azure by providing centralized updates, Global 24/7 Support – and – the ability to run analytics on the Hyperledger itself – all the while making use of the tremendous processing power and practically zero downtime of mainframes,” explains Allan Zander, CEO at DataKinetics. “On balance – and IMHO – the IBM offering in this regard currently provides a far greater degree of comfort in choosing which platform provides better reliability and support.”

HyperLedger is an open source Apache blockchain initiative that IBM has been spearheading, and represents generally the industry at large’s ‘big iron’ blockchain efforts.

The question remains, however, whether this mainframe-centric approach to blockchain that addresses the needs of the banking industry delivers cost savings as a primary benefit. “The clear advantage of innovating on the mainframe is that organizations can take advantage of the speed, cryptography and reliability of z Systems for hosting blockchain while seamlessly integrating with transactional data and applications already running on the mainframe,” says Serge Lucio, Vice President of Strategy at
CA Technologies. Lucio is thus emphasizing the strengths of mainframe-based blockchain while noticeably leaving out cost savings as an advantage.

Challenges of Scale

In fact, mainframes are most likely to come up in blockchain discussions because of the platform’s long-term reputation for scalability and security. “There are many ways in which the mainframe is tailor-made for Blockchain,” Lucio continues. “As Blockchain networks grow, with more and more members and transactions driving up the size of Blockchain ledgers, the scalability of the mainframe will become increasingly important. But perhaps the mainframe’s biggest selling point for Blockchain is security.”

Because blockchain has a distributed architecture, it requires multiple processing nodes scattered across multiple participants, both increasing overall costs per transaction while also leading to issues of scalability and performance.

Some experts are able to see through the hype to recognize the extent of such challenges. “Basically, a blockchain is a network across a large number of nodes. Each participant needs a node, which is the entry point into the blockchain,” explains Bernard Golden, industry thought leader and Vice President of Cloud Strategy at Capital One. “Keep in mind that a chain is only as strong as its weakest link, which is equally true of blockchains. If one node has performance, scale or security problems, they can impact the other nodes. A blockchain can be a powerful solution, but organizations should use it only when they have challenges that aren’t addressed well by existing technology.”

Even the IBM-driven HyperLedger initiative recognizes blockchain’s scalability challenges. “The Hyperledger Performance and Scalability Working Group announced in June shows that the scalability challenge has yet to be solved,” say Chris Haley, Corporate Strategy Director at ICF, and Michael Whitaker Vice President of Emerging Solutions at ICF, who are also fellow Forbes contributors. “Blockchain’s energy costs and storage requirements, as well as the uncertainty that accompanies any nascent technology, make it a far less scalable solution than existing databases.”

Sucking Up Electricity

Financial analysts have long recognized that power costs are an important part of the data center profitability calculation, but recent horror stories around Bitcoin processing have cast new light on the immense power requirements blockchain processing presents.

And yes, such electricity-centric cost considerations are not Bitcoin-specific, although Bitcoin’s transaction costs have recently gone through the roof. According to Blockchain Luxembourg, the Bitcoin cost per transaction has been bouncing around between $75 and $160 since the beginning of the year, in large part due to electricity costs – for a single transaction.

Such transaction cost considerations unquestionably apply to blockchain transaction processing in general. “A business case for blockchain must account for a host of potential costs beyond hosting, licensing, and implementation,” Haley and Whitaker continue. “Energy costs may rise tremendously as the transaction volume increases. On top of all this, a buffer for unknown-unknowns and perhaps a ‘complexity premium’ should be added.”

The Always-Expanding Cost of Storage

In addition to power, blockchains consume storage – and storage requirements will always be exploding, due to the fact that each individual node must maintain an immutable ledger of all transactions back to the origin of each blockchain.

Such storage costs are modest to start, but only go up over time. “Many of the applications that have been proposed for blockchains — energy markets, music streaming services, IoT, and so on — will require storage of vast quantities of transactional information,” explains Jamila Omaar, Internet Policy Intern at Interplanetary Database (IPDB) Foundation. “This is exactly the kind of data that should be stored within the blockchain database.”

Many people look to the cloud’s low-cost, highly scalable storage options as the solution to blockchain’s storage problem – but they’re not. “A blockchain database must store data indefinitely, so the [cloud’s] recurring payment model doesn’t work,” Omaar continues, estimating that the long-term storage cost per gigabyte for a Bitcoin node will exceed $22 million, based upon today’s transaction costs – and thus the actual number is likely to be even higher.

IPDB is one of a handful of startups looking to address the storage challenge. The vendor plans on a storage approach that will offer a fixed, one-time storage cost far less than today’s recurring cloud-based storage can offer.

Just one problem – the company hasn’t figured out the implementation details yet. “It’s hard to build a decentralized system that is strong enough to govern itself without falling victim to re-centralization,” bemoans Greg McMullen, Co-Founder & Executive Director at IPDB Foundation and Chief Policy Officer at BigchainDB.

Whether IPDB or anyone else will ever solve this problem remains to be seen.

Will Blockchain Ever Be Cost Effective?

Today, most if not all enterprise blockchain initiatives are in the proof of concept phase – and even though a few have had positive results, none of them have attempted to scale up or run for long periods of time.

Furthermore, much of the cost justification explanations available for blockchain are based upon unsound assumptions or are nothing more than hype – the Accenture/McLagan report included.

Not only does the report base its dramatic cost savings predictions on the ability for banks to replace legacy systems and infrastructure – an eventuality that is unlikely to occur – but it also fails to adequately account for exploding future costs in power and storage.

Nevertheless, blockchain still has promise for banks and other large enterprises, although cost savings is unlikely to be high on the list of value propositions.

If anything, IBM’s efforts with blockchain on the mainframe indicate that blockchain’s best chance at success will extend the traditional scalability, reliability, and security benefits that mainframe customers have long enjoyed. Just don’t expect anywhere near the unrealistic 70% cost savings figures that Accenture and others are promising.

Intellyx publishes the Agile Digital Transformation Roadmap poster, advises companies on their digital transformation initiatives, and helps vendors communicate their agility stories. As of the time of writing, CA Technologies and IBM are Intellyx customers. None of the other organizations mentioned in this article are Intellyx customers. Image credit: woodleywonderworks.

Jason Bloomberg is a leading IT industry analyst, Forbes contributor, keynote speaker, and globally recognized expert on multiple disruptive trends in enterprise technology and digital transformation.
He is founder and president of Agile Digital Transformation analy...